22 August 2007

Open Source Business Innovation and the Subscription Model

Stephen O'Grady has a great post (as always) on how companies using free and open source software in their customer solutions can make more money for their investors. Companies like MySQL, JBoss, and Red Hat, and now Canonical have all developed subscription offerings based on value added networks. There's good commentary from Javier Soltero (Hyperic CEO) and Zack Urlocker (Product VP at MySQL) as well — companies that are exactly engaged in this business. One of the business model innovations from the FOSS world that often goes unsung is exactly this subscription network model.

Traditional software companies have dreamed of "subscription revenues" for at least the last 7-8 years. These packaged proprietary software companies all claimed to want the smoothing of their revenue curves and its attendant predictability. They all speak in terms of "regular utility payments like your cable or phone or water", as if they actually want to be treated like commodity regulated utilities. Of course they don't want to be REGULATED like essential services. Of course they also don't want their pricing structures to reflect commodity pricing because of the unique value their technology represents. ("Commodity software? That's what open source is!") So they're left innovating small variations on maintenance and support agreements marketed as "Enterprise Agreements". And in large enterprises, these often end in Faustian deals negotiated with the friendly Draconian procurement departments.

Companies using FOSS in their solutions are delivering on a real subscription for value model. In each case they make it easier to use their solution (convenience = value) and easier to derive more value out of the solution (better ROI and better enabled new business opportunities), not simply easier to pay for it. Their networks each provide unique product related service beyond "support and maintenance".

These network subscription models also have another side that perfectly fits the "conversion problem" faced by so many open source software providers. [Insert classic Marten Mickos time/money trade-off quote about the early/late community here.] Subscription services are something that might scale well in the DOWNWARDS direction to enable more community users to become company customers.

Traditional packaged proprietary companies invariably end up caught when trying to reach new "low end" markets. (And that's when they even perceive they're missing a market opportunity that will evolve into their technology space or profitability profiles over time.) Their only perceived option is to hobble existing functional products, but there's no easy way to do this from an engineering perspective (most of the time), and there's invariably an internecine war fought in product marketing over market cannibalization and lost profits. See any of the struggles Microsoft has gone through in emerging markets or in the Vista menu of price/function options for examples of this.

By designing the network offering with a little forethought to this problem, a branded scaled set of offerings can be put into place that may well serve the low end user today to gain a small value add revenue stream scaled across the thousands of users that are not yet customers, will scale as these new customers evolve, but can also serve the existing larger enterprise customer base.

It's not that traditional packaged/proprietary companies couldn't think about such businesses, but their existing margins and profit profiles don't typically allow them to work this way. New companies with open source software focused solutions have the advantage here, necessity being the Mother of invention and all.